Magazine

A Blow to Accounting Reform

March 31, 2002

Prosecutorial justice has trumped public policy in the decision to indict the firm Arthur Andersen and not just those individuals responsible for shredding Enron Corp. documents. Even as the Securities & Exchange Commission was negotiating a civil settlement, the Justice Dept. proceeded to hold Andersen criminally liable. It was a bad decision.

The Justice Dept. has good intentions. It rightly argues that Andersen has consistently refused to fix itself despite repeated audit misconduct and must be held accountable. Supporters of Justice's decision say it will change the market for accounting and pressure other firms to reform themselves. We are skeptical.

Before the criminal indictment, under the proposed SEC settlement pact, Andersen committed to following a radical plan suggested by Paul A. Volcker that would have made it a model of accounting reform. Auditing and consulting services would have been separated, and lead partners on audits would have been rotated regularly. The other four members of the Big Five adamantly opposed the Volcker plan. They feared Andersen would adopt it and feel pressure to follow suit. Justice's decision now relieves them of changing very much.

The odds of lower-tier firms moving up to replace Andersen aren't good, either. Big corporations require global accounting to service their global operations. Andersen had 85,000 employees worldwide. Next-tier firms are so much smaller that they will find it difficult to compete. So expect more consolidation in the industry and more cosmetic change.

The Justice Dept. did what it does--prosecute. But the economy and the nation would have been better served if it had indicted individuals and let the firm work with the SEC to reform itself and the rest of the accounting industry.